Article / 20 May 2016 at 9:09 GMT

From the Floor: USD extends rally on new rate trajectory

Saxo Bank
  • USD remains bid across the board, extending rally triggered by FOMC minutes
  • New York Fed chief Dudley joins chorus of Fed speakers talking of summer rate hike
  • Core bond yields ease after jump
  • Swiss franc underperforms, possibly on Brexit relief trade
  • Commodities dented by strong USD, gold supported by buying through ETPs

By John Acher

The US dollar extended its rally on the back of reinforced expectations for a summer US interest rate hike after the New York Fed president William Dudley reiterated the message expounded by other Fed officials and the minutes of the Fed's April meeting. 

“The dollar is generally higher across the board, especially dollar-Swiss,” says Saxo Bank's head of FX strategy John J Hardy. 

Core bond yields stepped back a bit from the jump they took after the minutes of the Federal Open Market Committee's April meeting earlier this week showed that Fed officials are open to raising interest rates next month.

The Fed's Dudley got even more explicit than other Fed speakers by spelling out on Thursday that a summer hike is in play and specifically even a June hike if things develop as expected.

“Basically if we don’t see any negative surprises, we should be pointing towards a June hike. The market has priced in certainly much higher odds of that, but not fully yet, we don’t feel,” says Hardy. 

Markets are now looking ahead to the next key US data points, the PCE inflation data on May 31 followed by the June 3 US jobs report and ISM manufacturing indicator, for further confirmation that the Fed's tightening is on track.

Risk appetite key

“The focus from here […] is the direction of risk appetite," says Hardy. "If risk appetite is able to absorb this Fed hawkishness, then dollar upside is more on the policy divergence story – dollar-yen, euro-dollar, dollar-Swiss. If we get risk-off […], then it is more a dollar-EM, dollar-commodity-currencies focus as things line up in correlation with risk appetite.”

Correlations are going back to this risk-on, risk-off theme of markets past, Hardy says, referring to a Bloomberg story on the topic.

“It means there’s a lot of portfolio risk when that happens because it’s hard to get a diversified portfolio,” Hardy says.

The Swiss franc weakened somewhat more than other currencies, possibly on Brexit relief, with sterling-Swiss a popular trade, and EURCHF pushing up against 1.1100, says Hardy.

EURCHF pushes the envelope above 1.1100
 Source: Saxo Bank

“If we do close here on a weekly level at 1.11 or higher, it would be the highest close since the January revaluation, so keep the Swiss franc on your radar, as well as looking possibly to buy dips in USDCAD,” Hardy says.

The Canadian dollar could be in play in the next few days, with Canadian March retail sales and April CPI data due out today and a Bank of Canada meeting next Wednesday, Hardy says.

“I’m wondering if we get potential for an undershoot on the CPI, after all the Canadian dollar massively stronger from those January lows to the end of April, so focusing a bit on Canada today and next week,” he says.

Next week is more or less quiet on the US data front.

G7 finance ministers and central bank governors are scheduled to meet this weekend in Japan.

Japanese finance minister Taro Aso is likely to defend the Bank of Japan’s intervention policies under the premise of exchange-rate stability. ”We believe this will put a cap on yen appreciation for the week ahead,” says Saxo Bank Capital Markets trader Edmund Liu in Singapore.

Dollar dents commodities

"It’s been a week where commodities have had a bit of a rough ride with the dollar strength," says Saxo Bank's commodities strategy chief Ole Hansen.

Gold weakness, nonetheless, has continued to be met with strong buying through exchange-traded products, Hansen adds.

Gold found support at $1,245/oz retracement ahead of $1,227/oz (trend line)
Gold prices
Source: Bloomberg

Oil hovered just below $50/barrel, recovering from initial dollar-related selling.

The price of crude has been supported by multiple supply disruptions and very strong US gasoline demand, Hansen says.

But the oil glut prevents price spikes despite disruptions in Canada, Nigeria, Venezuela and Libya and continued shale bankruptcies in the US, he adds.

Federal Reserve system
The record of the Fed's April policy meeting, published on Wednesday, reset interest rate expectations, with a June hike now seen as a distinct possibility.  Photo: iStock

John Acher is consulting editor at Saxo Bank 

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.


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